20 OCTOBER 1984, Page 20

The economy

The Star Chamber awaits

Jock Bruce-Gardyne

Sentiment, as old Father Keynes used to teach us, is everything in markets. Back in the summer, when the Treasury — via the Bank of England — was fiercely asserting that there was no earthly reason for a rise in interest rates, the markets said 'pull the other one', and up they went. Now the wretched Norsemen slash their oil price (thereby offering the possibility of a cheaper oil burn at our power stations unless the Department of Energy can contrive to prevent it), ACAS throws in the sponge and NACODS calls upon its membership to honour the blank cheque they unwisely gave their leaders and shut the working pits, and sterling crashes down through $1.20. And do the markets signal higher interest rates? No, sir, they do not.

Yet it's hard to see what has really changed about the fundamentals. Mr Scar- gill's grip upon the miners' strike still looks as hard as ever. Oil prices are all a-skitter. Henry Kaufman's pessimism about the outlook for US interest rates is undimi- nished. President Reagan's discomfiture at the hands of Walter Mondale in their first television debate has made little impact on his lead in the opinion polls. The rate of growth in domestic earnings continues handsomely to outstrip domestic inflation and too much of the overseas competition. The institutions have recovered their appe- tite for indexed gilts — but that is not exactly a message of comfort and joy about inflation expectations. This week produced what according to the Treasury ought to be the last month of net borrowing by Gov- ernment before next April, and they had better be right, since the target for the year is already hit. Predictions of sterling M3 crashing to the bottom of the chosen target range — or below it — continue to be based on hope rather than experience. Sterling looks awful shaky. So while in- terest rates may yet resume their down- ward path in time, that eventuality looks like owing more to government concern about the progress of recovery than to the performance of the indicators of domestic credit conditions.

What we are witnessing, I suggest, is a two-way traffic: sentiment feeds on ex- pectations, while at the same time expecta- tions feed on sentiment. The market de- tects — whether rightly or wrongly — a subtle change of emphasis in Whitehall from the sanctity of monetary and inflation targets to preoccupation with the trend of unemployment. So whereas in the summer it calculated that sterling weakness would provoke a jump in base rates and took up position to ensure that its prophecy would be self-fulfilling, now it calculates that (almost) nothing on earth would provoke the Chancellor to let. interest rates run up again, and that (almost) any justification will be seized upon to get them further down. And takes up position accordingly — thus making it easier for the authorities to go for somewhat cheaper money.

But have the markets read the runes aright? On balance I think they probably have. Before we were all distracted by that awful bomb in Brighton last week (and I, for one, have every reason to be grateful to the good Victorians who built the Grand Hotel: had it been a product of the hotel-building fashion of the 1960s and '70s I don't think I'd have been writing in this week's Spectator) the progress of debate within the Government about its economic strategy was becoming a good deal clearer. Peter Walker had thrown down the gaunt- let once again with a scarcely veiled attack upon the Chancellor and his supposedly arid attachment to 'dogma'; and Nigel Lawson was widely accused of displaying an almost contemptuous disdain for con- cern about employment among the faith- ful. Yet in practice the argument is much more about means than about ends. 'Wets' and 'dries' are really now at one in giving top priority to the dole queues, and the belief that ministers should concentrate on things they can really. influence, such as competition, taxation, restraint of public spending, and inflation, leaving job- creation to the private sector, is demode.

The essential difference now between the Treasury and its critics is that the Treasury thinks the way to tackle the dole queues is to loosen up our labour markets by clipping the wings of bodies like the wages councils which exist to push wage rates up above market-clearing levels and putting extra backbone into management with a view to widening differentials be- tween the starting rate for school-leavers and the rate for time-served adults, and also possibly by some reduction in em- ployers' insurance costs, while lifting tax thresholds via a further shift to indirect

taxation and continuing to narrow the budget deficit so as to make room for reductions in the real cost of borrowing. The critics, on the other hand, believe that bigger deficits resulting from souped-up infrastructure programmes as well as tax cuts are the way to bring home the bacon. Look at President Reagan, they cry. We were left in no doubt in Brighton on which side of the argument the Prune Minister comes down. She stands four- square behind the Chancellor. Now according to the Whitehall folklore that should be the end of the matter: when Numbers 10 and 11 Downing Street are mutually supportive, no amount of huffing and puffing will shift them. Unfortunately history teaches us that this is not inevitably the case. Prime Minister and Chancellor presented a front of total solidarity against the importunings of the spending ministers four years ago: and lost. It is not altogether beyond the bounds of possibility that that could happen once again this year. We are told that the Treasury has successfully 'packed' the so-called Star Chamber which adjudicates upon the pub- lic expenditure review under the benign chairmanship of the indispensable Lord Whitelaw, with a lonely Scottish Secretary, George Younger, quite outnumbered by the present Chief Secretary, Peter Rees, and his two predecessors,'Leon Brittan and John Biffen. I would't be so sure. John, Biffen, for one, may be a former Clue' Secretary; but when he held that post he was something of a disappointment to the Treasury, and he has never exactly sound- ed like a paid-up member of the Nigel Lawson fan club. At any rate it looks as though the Star Chamber will have some rather daunting gaps to bridge. There is, for example, no sign that the Ministry of Defence has begun to come to terms with the budgetary restraints the Treasury was supposed to have imposed upon it in 1983; yet the cost of Trident rises by the hour. Still, our present Chancellor is a man of steely determination who is not at all given to losing. It looks as though he may already have contrived to see off Sir Denis Rooke s wizard scheme to purchase gas supplies , from Norway at a premium price he would not dream of paying in the UK North Sea, and that at what promises to be a period of plentiful supply. Peter Walker has already gone public against a `Scargill tax' on electricity prices: but he lost that battle last time round and the smart money must therefore be against him. A good deal turns upon the outcome of the annual Public Spending Challenge CUP this year. If the Chancellor and Prime Minister emerge victorious the Chancellor is likely to be emboldened to press on with cuts in interest rates whenever possible, followed by reductions in direct taxes and insurance costs in the Budget. But if theY were to lose I suspect we could then be in for a repetition of what happened in 1981, when a defiant Premier and Chancellor made the spending ministers pay for their discomfiture with extra tax all round.